Production efficiency of internet-only banks and conventional banks: Evidence from China and Japan

Abstract

In recent years, Internet-only banks have begun participating in many countries' financial markets; however, their impact on these markets requires clarification. This study focused on China and Japan and covered the period from 1995 to 2019. We utilized the stochastic frontier approach to estimate the output distance function with a view to comparing production efficiency before and after the entry of Internet-only banks into the financial markets of both countries. The results revealed that China's Internet-only banks are more efficient than conventional banks, while the opposite is true in Japan. Furthermore, although Japan's Internet-only banks outperformed China's, Japan's conventional banks were less efficient than were those in China; this finding suggests that Japan's Internet-only banks adopt more advanced production technologies. Finally, the results of stochastic meta-frontier regression supported the notion that national banks in both China and Japan outperformed private banks between 2015 and 2019.